USD/ZAR: Not yet convinced that the worst is over for the South African rand – MUFG

The USD/ZAR is rising 1% on Tuesday at 16.650, amid a strong US dollar versus emerging market currencies. Analysts at MUFG Bank see that the recovery seen during the last week of the South African rand so far is just a “temporary reflief”. They forecast USD/ZAR at 17.250 by the end of the third quarter and at 16.500 by the end of the first quarter of 2023. 

Key Quotes:

“The combination of tighter Fed policy and lower commodity prices is an unfavourable combination for the rand. In recent weeks there has been some temporary relief for the rand as global equity markets have staged a modest rebound and US yields have corrected lower. However, we are not yet convinced that the worst is over for the rand. It is premature to expect the Fed stage a dovish pivot in the near-term even as evidence continues to build that the US economy is slowing.”

“The SARB (South African central bank) has recently sped up the pace of rate hikes that is helping to provide more support for the rand. USD/ZAR broke back below the 17.000-level after the SARB delivered a larger 75bps hike on 21st July. It follows a further pick-up in the headline rate of inflation to 7.4% in June. On the other hand, the SARB has become more pessimistic over the outlook for growth next year (+1.3%). Tighter monetary policy and rolling energy blackouts, with outages hitting record levels so far this year, are increasing downside risks to the growth outlook.”